Wash sales may look like a good way to claim a tax deduction, but looks can be deceiving.
A wash sale takes place when you sell or dispose of a stock, bond, option, or other security at a loss and repurchase the same or buy a substantially identical security shortly afterwards. The wash sale must take place within the 61-day period beginning 30 days prior to the sale or disposition date and end 30 days after the sale or disposition date that you acquire the same or substantially similar stock or security (or a contract/option to buy a substantially similar stock or securities).
Regulations around wash sales are designed to prevent an investor who holds an unrealized loss and wishes to make it claimable as a tax deduction within the current tax year. The disallowed losses are added to the cost basis of the newly purchased stock or securities. This addition results in a postponement of the loss recognition until the sale of the new stock or securities.
The holding period for the newly purchased stock or securities begins on the same day the original stock or securities were purchased.
Important Note: You cannot use an IRA or Roth IRA to avoid the effect of the wash sale rule. Even through your IRA, when you sell stock or securities for a loss and purchase substantially similar stock or securities within the 61-day period beginning 30 days prior to the sale and ending 30 days after the sale, the loss on the sale is still disallowed.
If you have questions about the wash sale rule, contact me at firstname.lastname@example.org or your Berdon advisor. We’d be happy to help you assess whether a wash sale works for your financial circumstances.
Scott T. Ditman, a tax partner and Chair, Personal Wealth Services at Berdon LLP, New York Accountants, advises high net worth individuals and family/owner-managed business clients on building, preserving, and transferring wealth, estate and income tax issues, and succession and financial planning.